For Facebook and Alphabet, Big-Ticket Fines Cause Limited Pain

Date : 07/30/2019 @ 4:19PM
Source : Dow Jones News
Stock : Alphabet Inc (GOOGL)
Quote : 1240.03  5.06 (0.41%) @ 1:00AM

For Facebook and Alphabet, Big-Ticket Fines Cause Limited Pain

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By Theo Francis 

Facebook Inc. and Google parent Alphabet Inc. have been hit with some hefty fines, but a closer look shows that for these tech giants, the penalties aren't as huge as they seem.

The Federal Trade Commission recently fined Facebook $5 billion to settle allegations that the company violated a 2012 order from the agency by deceiving users about the privacy of their data. The penalty is equivalent to about 16% of the company's 2018 operating expenses, the day-to-day cost of running the business.

Put another way, it amounts to 59 days of ordinary expenses such as research and development spending, marketing and administrative costs for the social-media giant. Facebook reported holding about $13.9 billion in cash and equivalents at the end of June, plus $34.7 billion in marketable securities.

Other recent fines imposed on Facebook were smaller. The $100 million Facebook agreed to pay to settle allegations by the Securities and Exchange Commission that the company had inadequately warned investors about misuse of user data, works out to just over a single day's operating expenses. A fine over privacy violations, imposed by the U.K.'s Information Commissioner's Office in October -- valued then at $645,000 -- amounts to about 11 minutes of operating expenses.

A Facebook spokeswoman declined to comment about the settlements, and the company agreed to settle the FTC and SEC investigations without admitting or denying guilt. After the U.K. penalty, Facebook said it disagreed with some of the agency's findings but acknowledged it should have done more to investigate and act on complaints years before.

In a news release about the FTC settlement, Facebook described its handling of the privacy issues that gave rise to the FTC investigation "a breach of trust between Facebook and the people who depend on us to protect their data."

Facebook has said other aspects of the settlement -- including terms requiring the company to document and assess potential privacy risks and CEO Mark Zuckerberg to certify that the company is meeting its privacy commitments -- are more significant than the fine.

"We have a responsibility to protect people's privacy," Mr. Zuckerberg said in a post last week on the company's social-media platform. "We already work hard to live up to this responsibility, but now we're going to set a completely new standard for our industry."

Financial penalties typically are meant to discourage further misbehavior or make victims whole, said Nell Minow, vice chair of ValueEdge Advisors, a corporate-governance consulting firm for investors.

"That second one is out the window -- no one is getting their information back," Ms. Minow said. "As for the first one, you have to add another zero onto it to make it painful enough."

FTC Chairman Joe Simons called the $5 billion Facebook fine significant compared with prior U.S. and global privacy penalties. "The enormity of this penalty resets the baseline for privacy cases and serves as an important deterrent for future order violations," he said in announcing the penalty.

This spring, European antitrust regulators fined Google $1.7 billion amid allegations that the search engine prevented rivals' ads from displaying on some webpages. The total amounts to 1.5% of Alphabet's 2018 operating expenses, or less than a week's worth. Alphabet reported holding about $16.6 billion in cash and equivalents at the end of June, as well as $104.5 billion in marketable securities.

In addition, a $5 billion fine imposed in July 2018 by the European Union's antitrust regulator, which said Google had abused the dominance of its Android operating system to promote its search engine, was just under 17 days' worth of operating expenses. And a June 2017 fine of $2.7 billion by EU antitrust regulators, over Google's comparison-shopping service, was the equivalent of 12 days' worth.

An Alphabet spokeswoman declined to comment.

This spring, Alphabet stressed its cooperation with European regulators and said it would let Android users in Europe choose which browser and search apps they use. At the time of the earlier European penalties, Alphabet said the decisions ignored competition between its Android operating system and Apple's iOS and underestimated the value users get from its shopping ads.

For both Facebook and Alphabet, the penalties are smaller when measured against the total value of the companies, rather than annual operating expenses.

Facebook's recent fines, combined, amount to about 0.9% of the company's recent market capitalization, which is $559 billion based on Monday's closing share price, and just under 6% of its stockholders' equity -- a measure of corporate net worth that represents the difference between a company's assets and its liabilities. Alphabet's $9.4 billion in EU fines equate to about 1.1% of its recent market capitalization, which is $860 billion based on Monday's closing share price, and about 4.9% of its stockholders' equity as of June 30.

Write to Theo Francis at theo.francis@wsj.com

 

(END) Dow Jones Newswires

July 30, 2019 11:04 ET (15:04 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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